The Fundamentals of Cryptocurrency Margin Trading

2021/11/04 10:54:26

Imagine you see a trade that's too good to be true. Every indicator you've used to check and recheck is pointed in one direction, and you are happy you should be making some decent profits. Just one issue - you wish you had more cash.

The above-explained scenario is the typical issue most crypto traders face. The profit you make is directly proportional to your investment capital - lower the capital, lower are the gains, and vice versa. However, trading on a margin account is different and interesting. In a margin account, the broker or a crypto exchange lends the investor money to buy more cryptocurrencies than they could otherwise buy with the available cash in their account.

Understanding Crypto Margin Trading

If we have to use two words to explain Margin trading, 'Leverage and Exposure' would be the best fit. Users can leverage their existing cryptos to put more steam on their buying power, hence making more money than they would without the leverage. Margin trading can be used to go long (predicting a cryptocurrency price will go up) or go short (predicting a cryptocurrency price will go down). They are instrumental in speculating or hedging.

For example, Dave is a crypto trader that just got introduced to KuCoin by his friends. Dave wants to short an altcoin , but he has only $100. Margin trade allows Dave the chance to short the asset class and do so at leverage. If Dave chooses 10:1 leverage, he will be given access to 10 times his deposit. In this case, let’s assume Dave deposited $100; and he can borrow $900 from the margin trading market, so that his total investable amount equals $1,000.

Terminologies

Margin: Margin is the minimum amount you must deposit to qualify for a loan (leverage) from your broker or crypto exchange. If you want a 10:1 leverage, you must have '1' while your broker gives you '9'. For instance, to get $1000 exposure on a 10:1 leverage, your Margin will have to be $100.

Leverage: A leverage is calculated in ratio form. It refers to the exposure given to you by your exchange based on the amount deposited. Different financial assets have different leverage, but cryptocurrency brokers have the highest of all financial markets.

Margin call: No cryptocurrency trader likes being Margin called. A margin call is a temporal stop of your position due to losses that would lead to liquidation in no time. In a margin call, the value of the margin account has fallen below the broker's required level, and the trader is required to sell some of his positions or deposit more money to meet the minimum Margin.

Liquidation: Liquidation, in contemporary terms, can be likened to your bank coming to lock the building used as collateral because the borrower is unable to repay his loan. The bank here is your crypto exchange, and liquidation is nothing new to experienced traders. Liquidation occurs when there is a loss (partial or total) to a trader's initial Margin.

Pros And Cons of Margin Trading

Pros

Margin trading in cryptocurrency may be crucial for more substantial profits as more access to more funds by borrowing and repaying the loans plus a lower interest. In this way, users can amplify their profits if he or she goes in the right direction;
With Margin trading, you can diversify. Small positions can be opened with a small amount of capital, but you enjoy the freedom that would otherwise not be possible because you are using some form of leverage.

Cons

Just as you can make huge money by having leverage, you can also lose much when the market goes against your choice.
You can invite significant losses when there's a rug pull, and you happen to be on the wrong end. In simple words, more volatile cryptocurrencies could mean amplified losses even on small investments.

How To Trade Using Margin On Kucoin?

Margin Trading on the KuCoin platform is relatively straightforward.

Step 1: Visit the official website of KuCoin and register (sign-up)

Step 2: You will then need to enable margin trading on your account. To do this, when you log in to the Kucoin website, click on "Trade" and select "Margin Trading."

Step 3: Select the asset class you want to trade using leverage and on the bottom right corner, click “Enable”

Step 4: Next, you'll need to deposit funds on your Margin account after depositing funds, select the asset class you want to trade and your preferred leverage multiple (In the below example, we chose an asset class whose leverage is fixed at 10X)

Step 5: Select your preferred order type and enter the trade based on your analysis.

Step 6: When you make profits, and you want to return your borrowed funds, there are two methods you can go about it. You can decide to repay the loan on a 'time priority basis' - meaning you repay the borrowed tokens first. Or, you can replay on an Interest rate priority basis - you repay tokens with higher interest rates first. More information related to this can be found here.

Conclusion

Trading cryptos on KuCoin is a seamless process, and to cap it up, you don't risk forced liquidation. With this, you can take as much risk as you want but make sure it is calculated. If you are a novice crypto trader, please consider using small leverages, which you can increase as you gain more experience. Also, consider trading on a demo account before getting started with margin trading on a real account to gain more insight into your psychology while trading.

Stay tuned and watch the KuCoin Blog for more interesting and valuable educational content. All the best!

Did you know that KuCoin offers premium TradingView charts to all of its clients? You can step up your technical analysis and easily margin trade Bitcoin and other popular altcoins with this.